JEL Code: F420

Taiki Murai; Gunther Schnabl

Abstract

The paper analyses the role of fiscal and monetary policy for the development of the current account imbalances in the euro area, including the most recent developments during the coronavirus crisis. Several financial transmission channels such as international bank lending, changes in TARGET2 balances, international rescue credit and government bond purchases of euro area central banks are identified. It is found that differing fiscal policy stances which have interacted differently with the ECB’s monetary policy have been at roots of first diverging and then converging current account positions in the euro area. Since the European financial and debt crisis, public financing mechanisms and the unconventional monetary of the ECB have contributed to the persistence of intra-euro area current account imbalances.

Keywords: current account, current account imbalances, EU, euro, European Monetary Union, financial account, fiscal policy, Monetary policy, TARGET2.

JEL Codes: F320, F330, F420, H620.

Erschienen in

CESifo Working Paper No. 9153.

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Gunther Schnabl

Abstract

This chapter analyzes the evolution and effects of central bank crisis management since the mid-1980s based on a Hayek-Mises-Wicksell overinvestment framework. It is shown that given that the traditional transmission mechanism between monetary policy and consumer price inflation has collapsed, asymmetric monetary policy crisis management implies a convergence of interest rates toward zero and a gradual expansion of central bank balance sheets. From a Wicksell-Hayek-Mises perspective, asymmetric central bank crisis management has contributed to financial market bubbles, decreasing marginal efficiency of investment, increasing income inequality, and declining growth dynamics. The economic policy implication is a slow but decisive exit from ultra-expansionary monetary policies.

Keywords: Economic Theory, Economics and Finance, Financial Economics, Macroeconomics and Monetary Economics, Mathematical Models.

JEL Codes: E520, E580, E630, F420.

Erschienen in

The Oxford Handbook of the Economics of Central Banking.

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